Operating Segments

3 Months Ended

Mar. 31, 2013

Operating Segments

10. OPERATING SEGMENTS

The Company’s reportable segments are: North America, Europe, Russia and Other. This determination is based on the unique business practices and market specifics of each region and that each region engages in business activities from which it earns revenues and incurs expenses. The Company’s reportable segments are based on the allocation of managerial responsibility for its client base. Because managerial responsibility for a particular client relationship generally correlates with the client’s geographic location, there is a high degree of similarity between client locations and the geographic boundaries of the Company’s reportable segments. In some specific cases, however, managerial responsibility for a particular client is assigned to a management team in another region, usually based on the strength of the relationship between client executives and particular members of EPAM’s senior management team. In a case like this, the client’s activity would be reported through the management team’s reportable segment.

The Company’s Chief Operating Decision Maker (CODM) evaluates its performance and allocates resources based on segment revenues and operating profit. Segment operating profit is defined as income from operations before unallocated costs. Generally, operating expenses for each operating segment have similar characteristics and are subject to similar factors, pressures and challenges. Expenses included in segment operating profit consist principally of direct selling and delivery costs as well as an allocation of certain shared services expenses. Certain expenses are not specifically allocated to specific segments as management does not believe it is practical to allocate such costs to individual segments because they are not directly attributable to any specific segment. Further, stock based compensation expense is not allocated to individual segments in internal management reports used by the CODM. Accordingly, these expenses are separately disclosed as “unallocated” and adjusted only against the Company’s total income from operations.

Revenues from external customers and segment operating profit, before unallocated expenses, for the North America, Europe, Russia and Other reportable segments for the three months ended March 31, 2013 and 2012, were as follows:

	Three Months Ended March 31,
	2013		2012
Total segment revenues:
North America	$	63,057	$	42,863
Europe		46,153		39,861
Russia		12,353		9,477
Other		2,613		2,170
Total segment revenues	$	124,176	$	94,371

	Three Months Ended March 31,
	2013		2012
Segment operating profit:
North America	$	14,181	$	9,726
Europe		8,371		8,660
Russia		632		319
Other		84		201
Total segment operating profit	$	23,268	$	18,906

Intersegment transactions were excluded from the above on the basis that they are neither included into the measure of a segment’s profit and loss by the CODM, nor provided to the CODM on a regular basis.

Reconciliation of segment revenues and operating profit to consolidated income from operations is presented below:

	Three Months Ended March 31,
	2013		2012
Total segment revenues	$	124,176	$	94,371
Unallocated revenue		22		12
Revenues	$	124,198	$	94,383

	Three Months Ended March 31,
	2013			2012
Total segment operating profit	$	23,268		$	18,906
Unallocated amounts:
Other revenues		22			12
Stock-based compensation expense		(2,576	)		(1,550	)
Stock charge		—			(640	)
Non-corporate taxes		(820	)		(725	)
Professional fees		(1,350	)		(429	)
Depreciation and amortization		(715	)		(157	)
Bank charges		(332	)		(249	)
Other corporate expenses		(1,961	)		(1,384	)
Income from operations		15,536			13,784
Interest and other income, net		630			476
Foreign exchange (loss)/ gain		(499	)		80
Income before provision for income taxes	$	15,667		$	14,340

Geographic Area Information

Management has determined that it is not practical to allocate identifiable assets by segment since such assets are used interchangeably amongst the segments. Geographical information about the Company’s long-lived assets based on physical location of the assets was as follows:

	As of March 31, 2013		As of December  31, 2012
Belarus	$	39,252	$	40,095
Ukraine		5,346		5,357
Russia		3,118		3,234
United States		2,942		2,048
Hungary		1,959		1,744
Other		648		657
Total	$	53,265	$	53,135

Long-lived assets include property and equipment, net of accumulated depreciation and amortization.

Information about the Company’s revenues by client location is as follows:

	Three Months Ended March 31,
	2013		2012
United States	$	59,049	$	46,039
United Kingdom		27,068		22,928
Russia		11,738		9,098
Switzerland		9,280		6,145
Canada		5,425		783
Germany		4,533		3,482
Kazakhstan		2,465		1,671
Sweden		1,255		1,455
Netherlands		787		790
Spain		632		345
Other locations		528		560
Reimbursable expenses and other revenues		1,438		1,087
Revenues	$	124,198	$	94,383

Service Offering Information

Information about the Company’s revenues by service offering is as follows:

	Three Months Ended March 31,
	2013		2012
Software development	$	83,780	$	62,883
Application testing services		24,153		18,868
Application maintenance and support		10,839		8,241
Infrastructure services		3,410		2,604
Licensing		578		700
Reimbursable expenses and other revenues		1,438		1,087
Revenues	$	124,198	$	94,383